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From the Frying Pan Into the Fire: Texas Charter School Leaders Need to Prepare Now for Instability Over the Next Few Years

April 17, 2020

By Dr. Alan Seay

The last four weeks have been historic. Someday, maybe two or three years from now, we will all look back on what schools did in the last month and marvel at the accomplishment. Across the nation, 55 million school children are now going to school in a fundamentally different way. When faced with this unprecedented crisis, thousands of schools completely transformed the way they deliver instruction in a matter of a few days.

And charter schools have been leading the way. The Center on Reimagining Public Education published a report comparing the distance learning plans of the largest 82 traditional public schools and 18 large charter management organizations (CMO). The report showed the CMOs were well ahead of the traditional public schools in providing true distance learning to their students. Anecdotally, I have personally witnessed several Texas charter school leaders put distance learning plans into place for their students over the last few weeks. Your accomplishment has been nothing short of amazing. And, the beneficiaries are the hundreds of thousands of Texas charter school students you serve. Kudos to you!

Unfortunately, this crisis will likely cause another, potentially more threatening crisis for charter schools. The next crisis is not a resurgence of the COVID 19 virus, although some medical professionals are predicting another fight with this virus in the fall. It will be about resources – or better said, the lack of money.

The economic impact of millions losing their jobs, thousands of businesses being forced to temporarily close, dollars not being spent on goods, the loss of tourism and travel will all have an impact on funding for state and local governments. The Brookings Institute said, “Large scale ‘social distancing’ will reduce consumer spending and workers’ wages and, in turn, cause sales and income tax revenues to plummet.” State and local governments which rely on sales tax will be especially hit hard.

Large reductions in state budgets will surely impact public education. One of the leading experts on school funding is Marguerite Roza, the director of the Edunomics Lab at Georgetown University. In addition to the reductions in total general state revenue, Roza says, “K-12 education will be competing for fewer state dollars against priorities like emergency public health, Medicaid, and higher education (which tends to see enrollment rise as the economy falls). At about $270 per K-12 pupil, the recently passed federal stimulus package will likely fall far short of filling the inevitable fiscal gaps.”

Texas will not be immune to these issues. We rely on sales tax to fund 36.3% of the total state budget, a figure that ranks tenth in the nation. Texas Comptroller Glen Hager has already begun ringing the warning bell, saying that “while it was too soon for specific forecasts, both (the economy and the 2019-21 budget) are expected to take potentially massive hits in the wake of the new coronavirus pandemic”.

On top of that, the oil market is down. Oil production taxes are the fifth largest revenue generator for the state budget. Add in reductions to hotel taxes, rental car taxes, and taxes on the sale of new cars, it all points to a significant downturn in state revenue.

In Texas, funding for public education is the second largest part of the state budget. The last time the legislature faced this type of reduction in state funds was 2011 following the “Great Recession.” Then, reduced state revenues led the legislature to cut $4 billion from public education. I believe we are likely headed for an even greater reduction in 2021. I also think that since charter schools are funded almost entirely by state revenues and typically operate with narrow margins, the impact on charter schools could be even more drastic.

It is important the charter leaders keep this in mind not only as they plan for next year but consider steps that can be taken right now to help prepare for the coming financial crisis.

Remainder of the 2019-20 Fiscal Year

1. Save on personnel expenses

Our state has been tremendously supportive of public schools and continued to provide schools funding for students even when they aren’t in attendance. However, you can take some steps to save some money during the remainder of this fiscal year. First, freeze any new discretionary hiring for the remainder of this fiscal year. Second, postpone promotions of personnel that might have normally taken place this spring and summer.

2. Evaluate current contracts

Gene Zhu, a Texas charter school finance expert, suggests reviewing your current contracts for services impacted by not having students and teachers in your facilities. First, make sure your current contracts are critical and cancel any that are not necessary. Second, consider renegotiating other contracts that may have monthly minimum payments. Some of your contracts may contain monthly minimums that could be renegotiated during this time.

3. Arrange lines of credit with your bank

Take this time to begin that conversation with your banks and other financing institutions. Lines of credit are normally low interest cash loans that could come in handy later. These types of instruments typically take weeks, if not months, to negotiate and finalize. The last thing you want is to be scrambling next summer trying to arrange additional cash due to unexpected state budget cuts.

4. Postpone planned capital expenditures if possible

Many of us use the summertime to make capital improvements to our facilities. Obviously, some of these are necessary and may not be delayed, however some may be able to be delayed until next year. Can you make that HVAC system you planned to replace last one more year? Can you use the computer lab again next year instead of replacing it this summer? Evaluate any planned capital expenditures to see if they can be postponed.

5. Explore funding support from the federal government

The federal response to the COVID 19 crisis includes several programs that charter schools may qualify for. Because the coronavirus was declared a national emergency by President Donald Trump, schools can apply next year for assistance from the Federal Emergency Management Agency for coronavirus-associated costs. Both TEA and charter school law firm Schulman, Lopez, Hoffer, and Adelstein have provided charter schools with multiple advisories concerning many of these programs.

Because Texas operates on a biennial budget that has already been set, schools may not see the full impact of reduced state revenues until the following year, 2021-22. The state may use the federal stimulus money and the rainy day fund to cover the decrease in state funding next year. However budgeting to save cash for next year will be critical.

Planning budgets for the 2020-21 School Year

  1. Be conservative estimating state revenues for 2020-21 budget

This is always good advice, but especially in times of economic uncertainty. If they follow previous years’ patterns, TEA will release your first Summary of Finance for 20-21 sometime in May. That first release is based on several incomplete data points and is notoriously inaccurate. For that reason you need to use the Charter School finance template to predict your state revenue (in fact, because of the fluid nature of TEA’s Summary of Finance, I recommend using the revenue template throughout the year to check your state funding). As you complete the template, purposely underestimate your enrollment and attendance rate. Since you are funded from the state on “average daily attendance,” this will lower your expected state revenue.

  • Budget staffing for your actual enrollment

Many charter schools fall into the trap of a “build it and they will come” mentality. However, I’ve never been at a charter school where all the students who were accepted actually showed up for the first day (or week) of school. Look through enrollment trends for the last few years and adjust your enrollment expectations based on those trends. The rise in unemployment from other industries should cause a “buyers” market for staff. During the last recession a lot of those who lost their jobs signed up for alternative certification programs to become teachers. I think we will see a similar phenomenon in the next few years.  

  • Consider postponing or delaying capital expenditures

Now is probably not the best time to be expending operational dollars buying real estate for expansion or paying design and construction fees on new buildings. I realize some of you are already in the middle of projects and can’t just stop them now. However, some of you are planning such projects next year.

  • Consider financing capital expenditures

Sometimes schools don’t have the luxury of postponing capital expenses. You may have an HVAC system that goes out and has to be replaced; you may be opening a new school/campus and need to buy technology equipment; or you may have to renegotiate a copy machine contract that is expiring. I usually don’t recommend financing if you have cash. However, the fact that schools need to hoard cash and the cost of borrowing money is extremely cheap, causes me to recommend looking into financing agreements for capital expenditures.

  • Consider refinancing bank loans and/or bond payments

Because of the interest rate environment, you may also want to investigate refinancing existing loans to seek more attractive terms. If you can cover the closing costs with your interest savings, it is certainly worth the look. Similarly, for those of you with bond debt, I recommend talking to your financial advisor to see about the possibility of refinancing your bond debt. Drew Masterson, a well-respected charter school financial advisor, recommends refinancing bonds to include interest only payments on the front end, during the worst of the recession, then leveling your payments once the crisis is behind us.

There is no doubt the unprecedented response to COVID-19 by both our country and state will have long term effects on Texas charter schools. To date, the Texas Education Agency has been nothing short of amazing in the response to this crisis. We are blessed in this state to have a talented network of associations and people supporting Texas charter schools. Texas Public Charter School Association continues to provide technical assistance, support and leadership for our schools. A myriad of other personnel, some referenced above, are available to provide support and assistance where needed. In short, while things may look a little bleak right now, with proper planning by our schools, with support from TEA, with the continued leadership from TPCSA, and help from our friends, we will make it through this crisis.

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